Managerial Overconfidence Research Articles

경영자과신성향이 주가지체에 미치는 영향

Purpose - This study deals with the manager's overconfidence and stock price delay, and verified whether the stock price delay phenomenon changes as the overconfidence increases.
 Design/methodology/approach - Manager overconfidence means that managers have over confidence in their positions or abilities, and was measured according to Schrand and Zechman (2012). Stock price delay is a phenomenon in which information of company is not immediately reflected in the stock price, but is reflected over time, and was measured by the method suggested in a study by Hou and Moskowitz (2005). The analysis subjects used in this study are companies listed on the KOSPI market between 2011 and 2019, and the final sample is 5,509 company-years.
 Findings - As a result of the verification, it was shown that the stock price delay decreased as the manager's overconfidence increased, and this effect was amplified as the foreign shareholder's share ratio increased and the number of follow-up financial analysts increased. This means that as the manager's overconfidence increases, he actively provides high-quality information to the capital market. In addition, as a result of subdividing the manager's overconfidence into the investment and capital raising aspects, the capital raising aspect has a significant effect on reducing stock delays. This can be interpreted as the fact that managers with overconfident tendencies have a greater incentive to satisfy investors' information needs.
 Research implications or Originality - In previous studies, the characteristics of managers with strong overconfidence have both positive and negative aspects. The results of this study are significant in that they clearly demonstrated the positive aspect through the market variable of stock price delay, and it is expected to help capital market stakeholders understand the characteristics of managers with a strong propensity for overconfidence.

Is Pakistan's Financial Distress Guilty of Accounting Misrepresentation? A Manager's Mediating Role Due to Overconfidence

This study's main goal is to determine the connection between accounting misrepresentation, managerial overconfidence, and financial distress among managers. Research indicates that there is a considerable correlation between financial distress and accounting misrepresentation. This problem has two aspects. Firstly, the management is under pressure to show the business's performance anytime there is financial trouble, but in reality, the business's performance deteriorates as a result of the financial distress. Stated differently, managers tend to manipulate their financial records at times of high uncertainty in order to win over the trust of their stakeholders and shareholders. Finally, the possibility of accounting fraud materializes if the firm's assessments, which are intended to avert charges of incapacity, are not met. A panel data regression model will be utilized to perform an empirical analysis of the hypothesis. For this study, panel data regression analysis was selected because it provides thorough insights into both cross-sectional and time-series data. The dataset includes data from 30 Pakistani companies that are listed on the Pakistan Stock Exchange, selected to represent a sample of the country's economy between 2010 and 2022. The study lays the groundwork for future investigations by recommending the use of corporate governance to control financial distress, managerial overconfidence, and accounting misstatement.

Compensations, overconfidence and use of loan terms

PurposeThis paper contributes to the literature as follows. First, it examines if option and stock compensations raise creditor's risk, and which one is more important than the other. Second, it explores if CEO's compensation interacts with CEO overconfidence to raise creditor's risk. Third, it investigates how banks use different loan terms to alleviate their credit risk.Design/methodology/approach This study used advanced regression analysis and use of generalized methods of moment methodology.FindingsThe results show that option compensation is more important than stock compensation in raising credit risk; option compensation interacts with CEO overconfidence, giving rise to a much higher credit risk; and covenant usage is more important than other loan contract terms in mitigating credit risk given that covenant use could not be substituted away by using other loan contract terms such as increasing interest rate, reducing principal or shortening loan duration. This paper has practical implications for credit markets.Research limitations/implicationsThe main implication is that hand-collect data are available up to 2010.Practical implicationsIt informs creditors the potential sources of loan risk emanating from option rather than stock incentives; it informs creditors that option incentive interacts with CEO overconfidence rendering the credit risk bigger than expected, and it informs creditors the importance of using covenants vis-à-vis other loan contract terms for mitigating compensation and overconfidence risk.Social implicationsBanks are alerted to the risk due to the interaction between overconfidence and compensations, implying that overconfident managers remunerated with options compensations are more risky than overconfident managers who are not remunerated as such.Originality/valueThis paper is original: (1) The authors show that option compensation is more risky than stock compensation from viewpoint of creditors. This has not been assessed. (2) Interaction between managerial compensation and managerial overconfidence has not been assessed before. (3) Use of different loan contract terms to alleviate risk from overconfident managers (who are prone to over investment but who are innovative according to the literature) has not been evaluated.

Optionality in Australian Football League draftee contracts.

Though player drafts have commonly been utilised to equitably disperse amateur talent and avoid bidding wars, often they have also been accused of creating a monopsony labour market which restricts player movement. Within the Australian Football League (AFL) some have called for the increase of the initial draftee contract from two to three seasons, which further pushes the envelope on monopsony power. Instead of increasing the contract length, this paper suggests a call option to be purchased by the teams allowing them to add a further season to the draftee contract at a predetermined compensation package should they choose to do so at the end of the initial contract. The call prices per pick were calculated using the Black-Scholes model and were valued between 1% and 1.5% of the pick value. However, it failed to follow a monotonic function similar to pick value, owing to managerial overconfidence and sunk investment plays. Overall, the findings allow teams to procure the option of increasing initial draftee contracts and not impede further on a player's ability to move.

Managerial overconfidence and enterprise shadow banking

This paper explores the impact of managerial overconfidence on shadow banking of non-financial enterprises. Selecting a sample of A-share companies in Shanghai and Shenzhen from 2012 to 2021. It is found that managerial overconfidence has a facilitating effect on shadow banking of non-financial enterprises; the facilitating effect of managerial overconfidence on shadow banking of non-financial enterprises is sharper in state-owned enterprises; and overconfident external auditing inhibits the effect of managerial overconfidence on shadow banking of non-financial enterprises.

Corporate dividend policy, managerial overconfidence, myopia, and investor irrationality: a complex concoction

Corporate dividend policy is a puzzle, especially when considering the effects of economic and behavioural factors. We develop a theoretical analysis of corporate dividend policy in order to analyse the effects of the complex mix of managerial moral hazard, overconfidence, and myopia on managerial incentives to increase or decrease dividends. Furthermore, we consider the effect of investor irrationality that drives corporate dividend catering behaviour. We investigate how this complex mix of economic and behavioural factors is likely to affect dividend policy. Our analysis provides a deep theoretical underpinning to understanding these effects and provides a basis for future empirical research.

Analysis of Management Overconfidence on Earnings Management in Non-Financial Companies Listed on the IDX

The aim of this study is how to analyze management overconfidence in earnings management in IDX-registered non-financial companies from 2016 to 2020. Revenue management Non-financial companies BUMN on 'IDX for the period 2016-2020 can be concluded that 2016 is volatile to 2020. This means that non-financial public enterprises will have improvements in their performance. annual profit management to minimize the risk of occurrence. Managers' overconfidence in non-financial EIB companies BUMN During the period 2016-2020, there were 11 companies with excessive confidence in the performance of managers, namely INAF, KAEF, KRAS, ADHI, WIKA, WSKT, ANTM, TINS, SMBR, GIAA, TLKM, while the other 5 companies showing low confidence are PGAS, PTPP, PTBA, SMGR, JSMR.

The research on non-linear relationship between enterprise digital transformation and stock price crash risk

This paper uses data from Chinese A-share listed enterprises to examine digital transformation’s impact and intrinsic mechanisms on the risk of stock price collapse. This paper finds that the impact of digital transformation on the risk of stock price collapse follows an inverted U-shaped trend characterized by initial exacerbation followed by subsequent suppression. Furthermore, we find that as most Chinese enterprises are still positioned at the left end of the inverted U-shaped curve in terms of their level of digital transformation, the impact of digital transformation on the risk of the stock price collapse is mainly characterized by exacerbation. Moreover, we discover that digital transformation influences the risk of stock price collapse by increasing agency costs and fostering managerial overconfidence. Lastly, the heterogeneity analysis results indicate that digital transformation’s impact on the risk of stock price collapse varies among different types of enterprises. The exacerbation effect of the former on the latter is primarily observed in small-sized and non-high-tech enterprises. Additionally, as the digital transformation progresses, large-sized enterprises and high-tech enterprises can benefit more rapidly from its positive empowering effects.

Purposive Sampling Technique and Ordinary Least Square Analysis: Investigating the Relationship Between Managerial Overconfidence, Transfer Pricing and Tax Management in Indonesian Stock Exchange-Listed Firms

Objective: This study investigates the relationship between managerial overconfidence, transfer pricing, and tax risk, with a focus on tax management's moderating role. Theoretical framework: Tax management is a critical concern due to its pivotal role in financing government activities. Low tax revenues in industries like manufacturing can adversely affect these activities, highlighting the need for effective tax management strategies. Managerial overconfidence can influence these strategies, potentially leading to positive and negative impacts on tax management. Method: Population of this study was manufacturing companies listed in Indonesia Stock Exchange in 2014-2019 period. The analysis made from 2015-2019, while 2014 was used as the basis to estimate the sales and asset growth as the proxy of managerial overconfidence. The sample of this study was selected using purposive sampling technique with the following criteria, manufacturing companies listed in IDX in 2014-2019 period, the company should have at least five companies in sub sector to estimate the managerial overconfidence per subsector to obtain data variation. Results and conclusion: Findings indicate a significant relationship between managerial overconfidence and tax management, with managers demonstrating overconfidence tending to employ aggressive tax management strategies, thus minimizing tax payments. Furthermore, this study reveals inconsistencies in the research surrounding overconfidence's impact on tax management, necessitating further exploration. Implications of the research: These results have implications for understanding the role of managerial traits in the decision-making process and developing effective tax management strategies to maximize government revenue. Originality/Value: The present study confirms the agency theory's efficiency perspective, stating that overconfident managers may minimize tax management practice due to risk contingency or because they consider the long-term benefit cost. Overconfident managers are viewed as more effective in taking advantage of the growth potential, allowing them to enhance the organization's performance instead of minimizing tax payment that contains risk contingency.

On or off: The triggering effect of underperformance duration on cooperative innovation

By complementing performance feedback theory with organizational pressure, we argue that underperformance duration breaks the balance between growth pressure and survival pressure and triggers the shift from “on” to “off” of cooperative innovation, which shows an inverted U-shaped relationship between the duration of underperformance and cooperative innovation. Moreover, compared with firms with historical underperformance, firms with peer underperformance will reach the inflection point of the inverted U-shaped relationship after a longer duration. In addition, we find that managerial overconfidence weakens the above relationship. Our hypotheses receive general support by testing the sample of 70 public biopharmaceutical manufacturing companies between 2007 and 2019 in China.

The moderating role of CEO overconfidence on debt maturity decisions: evidence from the MENA region

Purpose This study aims to analyze how cultural variations impact the relationship between long-term debt use and managerial overconfidence. Investigate into how the relationship between growth prospects and the utilization of long-term debt is moderated by managerial overconfidence. In addition, the research explores the moderating effect of managerial overconfidence on cash flow levels. Design/methodology/approach The study used long-term debt as the dependent variable and used generalized method of moments–instrumental variables regression analysis to examine data from 356 firms across 11 Middle East and North Africa (MENA) countries and 5 industries between 2013 and 2021. Findings CEO overconfidence moderately boosts the link between long-term debt maturity and growth potential, particularly for firms with limited internal funding. Cultural factors, such as masculinity and uncertainty avoidance, play a significant role in moderating the relationship between managerial overconfidence and debt maturity choices. Practical implications To understand the impact of managerial overconfidence on a company’s debt maturity decision, it is essential for boards and shareholders to consider and monitor the CEO’s behavioral traits, particularly for growing companies. Regulators and policymakers must also be wary of the risk of internal control weakening due to overconfident managers, especially in MENA markets. Originality/value The authors’ contribution to the literature lies in exploring how managerial overconfidence moderates the agency conflict between shareholders and debtholders in MENA region firms, which has received minimal attention in previous studies. This study expands the knowledge of the impact of managerial overconfidence on emerging economies and provides evidence that national culture plays a vital role in determining debt financing decisions.

CEO experience, managerial overconfidence and investment efficiency: Evidence from a natural experiment in China

We examine how the early lives and career experiences of CEOs impact corporate investment efficiency in the Chinese economy. We identify two extraordinary events that are likely to underlie CEOs' formative experiences: the economic reforms that commenced in 1978 and CEOs' prior career experiences. We show that CEOs who experienced the economic reforms and opening-up in their early adult lives tend to be more confident and overinvest more than those who grew up during the planned economy era. Furthermore, CEOs whose entire careers have been in the business sector exhibit greater levels of confidence and overinvestment than those with long-term public administration experience prior to their service as corporate executives.

Faithful or fearless: directors’ and officers’ liability insurance and management discussion and analysis tone manipulation

ABSTRACT We examine whether directors’ and officers’ liability insurance (D&O insurance) influences managers’ strategic tone manipulation of management discussion and analysis. We find that D&O insurance is positively associated with upward tone manipulation. This association is more pronounced for firms with greater litigation risk or highly-motivated and overconfident managers. Additionally, we document more favorable short-term returns and intensive reversals responding to positive tones issued by D&O insurance-covered firms. Besides, D&O insurance-shielded managers may inflate the tone by reducing risk-factor information disclosures. Overall, our results support that D&O insurance can trigger managers’ unethical manipulations by reducing their expected personal legal liability.

Microfinance's digital transformation for sustainable inclusion

PurposeThe purpose of this paper is to evaluate the performance of Microfinance Institutions (MFIs) offering FinTech services. This study contributes to the existing literature on microfinance digitalization, financial inclusion and sustainable development. The study also takes into consideration a behavioral perspective through the efficiency evaluation process of MFIs offering FinTech services.Design/methodology/approachThe following study employs the Stochastic Frontier Analysis approach to estimate the operational and social efficiency scores of the 387 MFIs over the period 2005–2019. Then, it tries to consider factors influencing MFIs' efficiency and assess their effects. Hence, two separate models for operation and social efficiency introducing a set of factors, including FinTech proxies and overconfidence proxies, are tested. The first model for operational efficiency uses a random-effects estimator while the second one for social efficiency uses a fixed-effects estimator.FindingsThe results show that innovative MFIs have weaker averages of operational efficiency than non-innovative ones but higher averages of social efficiency. This was justified by the fact that innovative MFIs are more socially oriented. Further, findings of this study depict that the proxies of FinTech affect negatively the level of operational efficiency of MFIs. They also depict a negative relationship between FinTech proxies and the level of social efficiency. These results hold through robustness tests.Originality/valueThe highlight of this study is that it takes heed of the indirect effect of technological innovation on the efficiency of MFIs. It has been proved that it moderates the impact of managerial overconfidence (manifested by excessive risk-taking, viz., high levels of PAR30, LGR and NIM) on the level of both operational and social efficiencies.

The Heuristics and Biases of Top Managers: Past, Present, and Future

AbstractPsychology‐grounded research on heuristics and biases in decision making has become increasingly influential in the field of management studies. However, although this line of inquiry is recognized as a valuable perspective for advancing understanding of decision processes in the upper echelons of firms, extant research remains unbalanced, the bulk of previous endeavours having been focused on managerial overconfidence, with insights from more recent dual‐process theory and ecological rationality conceptions of heuristics less explored. This introductory article to the special issue of the Journal of Management Studies, entitled ‘the heuristics and biases of top managers: Past, present, and future’, offers a reflective review of prior work addressing its focal theme and places the articles incorporated into the special issue within this broader context. In addition, it sets out a number of directions for future work, with a view to inspiring the continuing advancement of conceptual and empirical knowledge and management practice.

The Moderator Role of Managerial Overconfidence in the Relationship between R&D Volatility and Firm Value: An Application in Borsa Istanbul

Purpose: The study aims to reveal the moderating role of managerial overconfidence in the link between R&D volatility and firm value in firms operating in the Metal Goods Sector of Borsa Istanbul during the period 2010-2020. Design/Methodology: The moderating role of managerial overconfidence in the linkage between R&D volatility and firm value is investigated with panel data analysis. Findings: The short-run estimates reveal positive linkage determined between R&D volatility and firm value. We also reveal that managerial overconfidence positively moderates the link between R&D volatility and firm value. In this direction, the effect of R&D volatility on firm value is higher and positive in firms where managers have excessive self-confidence. Limitations: The fact that the sample consists of students who are only in Gaziantep and the use of three variables as a brand component are the limitations of the study. Originality/Value: The number of studies in the literature on the relevant period and sample is limited. Therefore, the study contributes to the literature and is original.

The bright side of CEO narcissism and its impact on accounting conservatism

PurposeThis study sheds new light on the personality trait and provides evidence regarding the relation between narcissism and desirable accounting practices, specifically the impact of CEO narcissism on accounting conservatism.Design/methodology/approachThe authors test the relation between CEO narcissism and accounting conservatism for a sample of 907 US companies and their corresponding CEOs for the period between 2010 and 2018. The authors apply three established models of accounting conservatism and measure executives' narcissism using a non-intrusive approach ubiquitous in the literature.FindingsThe authors find that CEO narcissism is associated with speculative accounting practices in the form of timely recognition of positive news and more prudent financial reporting of anticipated negative news. The authors provide the first empirical evidence that, despite its well-known negative effects on corporate financial reporting, executive narcissism can also produce positive outcomes.Originality/valueWhile managerial overconfidence has received much attention, the effects of executives' narcissism are still widely unexplored (Chatterjee and Hambrick, 2007). The authors thus contribute to the literature by investigating the relationship between CEOs' narcissism and accounting conservatism. The authors conjecture CEO narcissism should have a twofold effect on prudent financial reporting. On the one hand, CEOs' narcissism should be associated with low levels of unconditional conservatism due to excessively fast good news recognition. On the other hand, narcissistic executives should be associated with early recognition of negative news and hence with higher levels of conditional conservatism.

Product liability and firm owners’ delegation to overconfident managers

Abstract This article analyzes the socially optimal liability allocation when strictly liable Cournot firms delegate their safety and output choices to managers whose potential biases are chosen by firm owners and consumers misperceive product risks. Firm owners always hire managers who are overconfident about their product safety’s effectiveness in reducing product-related accident risk. However, the extent of overconfidence depends on consumers’ risk perceptions and the allocation of liability. As a result, the socially optimal liability allocation hinges on whether consumers underestimate or overestimate product risk. When consumers overestimate product risks, firms should be held liable for all losses incurred by consumers. However, when consumers underestimate risk, firms should only be held liable for a part of consumer losses. We also show that, in some circumstances, negligence produces socially more desirable outcomes than strict liability (JEL: K13, L13, L14).

Does overconfidence blur out the investment efficiency? The managerial overconfidence and internal financing effect on investment efficiency: evidence from MENA region

PurposeThis paper aims to investigate whether managerial overconfidence has an impact on investment inefficiency beyond its influence on the use of internal financing or whether internal financing behaves as a full intermediary.Design/methodology/approachThe study employed three dependent variables, namely business investment scale, overinvestment and underinvestment, and analyzed data from 282 firms across five different industries listed in 11 Middle East/North Africa (MENA) countries between 2013 and 2019 using regression analysis via least square dummy variable (LSDV).FindingsThe findings indicate that while internal financing can provide funding for investment opportunities and address capital shortages, it may also result in overinvestment, particularly in companies led by overconfident managers.Practical implicationsStakeholders, including shareholders and board of directors, should pay attention to the chief executive officer (CEO)'s behavioral aspects such as overconfidence in decision-making while undertaking new investment projects. Additionally, regulators and policymakers in emerging markets like MENA should re-evaluate the corporate governance framework, devise a corporate governance index and promote boardroom gender diversity as it can significantly reduce risk.Originality/valueThis study adds to the limited research on the impact of managerial overconfidence on investment efficiency in the MENA region. By focusing on this region, which has unique economic, political and social characteristics, the study provides new insights into the role of behavioral biases in investment decision-making in emerging markets.

Venture Company, Overconfidence, and Investment efficiency

This study examines the effect of venture companies" managerial tendencies on investment efficiency. These results indicate that managers affect company decisions, and a manager"s ability is important in evaluating a company"s decision. Moreover, These results suggest that overconfident managers of venture companies may prefer over or under-invest, and the tendency of managers of venture companies can harm the company value. Inefficient investments due to managers" overconfidence tendencies occur more in venture companies. Therefore, the negative impact on corporate value according to managers" propensity will greatly influence venture companies. This study has contributed to verifying the company"s internal factors for venture companies" investment activities. This study"s results will provide information on managers" abilities" effect on investors in venture companies. Second, this study provides interpretation information on the R&D expenditure of KOSDAQ companies and ventures.